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Concerns raised over potential litigation risks of SPACS

With special purpose acquisition companies (SPACS) becoming increasingly popular in the United Kingdom, it is important to recognise their potential litigation risks.

The danger of litigation is created by the complex nature of the SPAC investment during the various stages of a transaction and one of the keys to mitigating potential risks is to ensure appropriate due diligence.

The United States has seen a dramatic increase in the use of SPACs with a corresponding increase in the number of shareholder lawsuits. According to recent data, the number of SPAC class actions in the US doubled from seven filings in 2020, to 14 filings from January to May 2021.

Unlike the US system, UK-based SPACs are not required to make mandatory or prescribed "filings". However, they are required to make ongoing disclosures consistent with the obligations of any listed company. Litigation risks can arise from a leak of information or where the Financial Conduct Authority's listing rules require that SPACs contact the FCA to request a suspension. There are also risks relating to insider dealing, unlawful disclosure of inside information, and market manipulation.

Other areas of risk include at the initial prospectus stage when directors and promoters need to consider the extent to which they will be required to disclose information about potential targets. Another area of risk is the de-SPACing stage and SPACs directors and promoters need to understand the ramifications of giving too little or incomplete information to the public.

Shareholders could bring claims for loss suffered as a result of untrue or misleading statements or against directors for breach of fiduciary duty. Third party consultants may claim for unpaid fees or in relation to the level of compensation provided.

If a SPAC fails, there is the general risk of contractual and/or common law claims being brought and potential challenges to any management fees being deducted before investors are repaid.

The FCA's rules highlight the two years’ time limit for SPACs to find and acquire a target company, with the possibility of extending the period for up to an additional 18 months if certain conditions are met. This time element can lead to the risk of claims being brought for failures by the directors to promote the success of the company, and/or to exercise reasonable care, skill and diligence in carrying out their duties, and/or for failing to avoid conflicts of interest.

Civil and criminal cases in the US have highlighted the risks with founder-led SPACs transactions that are big on ambition but may not have a proven business model or product.

W Denis can arrange specialist insurance via 'Public Offering of Securities Insurance' as a non-cancellable 6 year policy, with its own dedicated limit of indemnity.

Whilst similar cover can be added by creating a 'Side C' extension to an annually renewable D&O policy, it is prudent to separately insure the Prospectus and other Liability arising from the SPAC IPO, to avoid claims eroding an annually renewably shared D&O Side A,B,C limit, in order to isolate and protect the availability of important Side A cover (non-indemnifiable loss cover to protect Directors and Officers for other wrongful act claims).

If you would like to discuss this insurance, or obtain a competitive quotation, please contact Daniel Moss at daniel.moss@wdenis.co.uk  or on 0044 (0)113 2439812

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